In the event that you intend to apply for a tax deduction this year, then a smart move would be to donate an automobile you no longer utilize to charity. Without denying that receiving a tax deduction would surely help your finances, keep in mind that the IRS has imposed stricter rules regarding charitable donations in the past few years. Moreover, it is advisable to reassess whether your generous donation will influence your auto premium for your other vehicle(s). To help you decide whether or not you should take this step, here are three questions to ask yourself beforehand.
1. Is it on the IRS approved list of charities?
To benefit from tax deduction, your donation must be an IRS-recognized 501(c)(3). In other words, you should consult the IRS’s Publications 78 and 4303 to determine if you are making a gift to a qualified charity organization. On a side note, if you want to learn more about the organization’s reputation, then you can consult the BBB’s website, as it rates charities based on 20 distinct standards.
After you are certain the organization meets the IRS prerequisites, contact them and find out how they intend to use the vehicle. While some organizations may choose to keep it and employ it to transport children or seniors, others will simply sell it via an auction. The information is important in establishing the tax deduction value you’re entitled to.
2. How will the donation affect your auto insurance?
Once you’ve donated your vehicle, your next step implies notifying your auto insurance company. Depending on your carrier, you might be able to provide all the info – meaning your name, car insurance number and vehicle ID – via the phone. Other companies could ask you to fill in a written request for canceling your insurance.
Even though you’re donating your automobile to benefit from tax deduction, make sure your action doesn’t lead to unintentional expenses elsewhere, such as a multi-car discount you were benefiting from, for instance. In addition, you may no longer be eligible for perks resulted from bundling your auto and home insurance with the same company. In addition to discounts, don’t forget ask your insurer if your donation would result in new and/or higher rates.
3. How much tax deduction are you eligible for?
As previously mentioned, the way the organization intends to utilize the vehicle influences the amount of tax deduction you’re entitled to. Therefore, if they intend to sell the car for cash, then you’re deduction will equal the sales price of the car, NOT its market value. To benefit from a deduction in the neighborhood of the automobile’s actual market value, the organization must use the car on a regular basis to conduct its activities.
A further criterion that affects the amount of tax deduction is your current marginal tax rate. For instance, if you’re donating a vehicle with an average $5,000 market value to an organization that will use it for deliveries and you’re in the 28% tax bracket, then your deduction will be around $1,400.
Lastly, don’t forget to get a receipt from the charity for your donation and, if they intend to put it up for auction, a notice of sale showing the final price.